Avaya India (P) ltd., Gurgaon v. ACIT (Ld. AO), New Delhi

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH : A : NEW DELHI BEFORE SHRI I.P. BANSAL JUDICIAL MEMBER AND SHRI A.K. GARODIA ACCOUNTANT MEMBER ITA NO.5150/DEL/2010 ASSESSMENT YEAR : 2006-07 AVAYA INDIA (P) LTD. DLF SQUARE SECOND FLOOR JACARANDA MARG DLF CITY PHASE II GURGAON. PAN : AAECA3592N VS. ACIT RANGE-2 NEW DELHI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PAWAN KUMAR CA & SHRI ADITYA GUPTA REVENUE BY : SHRI ASHOK K. PANDEY CIT DR ORDER PER I.P. BANSAL JUDICIAL MEMBER THIS IS AN APPEAL FILED BY THE ASSESSEE UNDER THE PROVISIO NS OF SECTION 253 (1) (D) OF THE IT ACT 1961 AGAINST THE ORDER PASSED BY THE ASSESSING OFFICER DATED 16 TH SEPTEMBER 2010 U/S 143 (3) READ WITH SECTION 144C OF THE INCOME-TAX ACT 1961 (THE ACT). THE ADDITION MADE IN THE PRESENT CASE IS `4 56 86 300/- ON ACCOUNT OF VARIATION IN INCOME AS A CONSEQUENCE OF ORDER OF TRANSFER PRICING O FFICER (TPO) U/S 92C (3) OF THE ACT. 2. A DRAFT ORDER WAS PREPARED BY THE LEARNED ASSESSING O FFICER U/S 144C DATED 24 TH NOVEMBER 2009 WHICH WAS SERVED ON THE ASSESSEE AS PER THE PROVISIONS OF SECTION 144C(1) OF THE ACT. TH E ASSESSEE PREFERRED AN APPEAL BEFORE DISPUTE RESOLUTION PANEL ( DRP) NEW DELHI. ITA NO.5150/DEL/2010 2 VIDE ORDER DATED 30 TH JULY 2010 U/S 144C OF THE ACT DRP HAS UPHELD THE ADJUSTMENT MADE BY THE TPO AND THE CORRESPONDING ADDITION MADE TO THE TOTAL INCOME OF THE ASSESSEE AND IN THIS MANNER THE IMPUGNED ASSESSMENT HAS BEEN FRAMED AGAINST WHICH THE ASSESSEE IS AGGRI EVED HENCE IN APPEAL. THE GROUNDS OF APPEAL RAISED BY TH E ASSESSEE ARE AS UNDER:- THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW: 1. THE ASSESSMENT ORDER PASSED IN PURSUANCE TO THE DIRECTIONS ISSUED BY THE LD. DISPUTE RESOLUTION PANEL (L D. DRP) IS A VITIATED ORDER AS THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION MADE BY THE L D. AO TO THE APPELLANTS INCOME BY ISSUING A NON-SPEAKING ORDER WITHOUT APPROPRIATE APPLICATION OF MIND. 2. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 44 446 736/- BY HOLDI NG THAT THE APPELLANTS INTERNATIONAL TRANSACTION IN THE NATU RE OF PROVISION OF SOFTWARE DEVELOPMENT SERVICES DOES NOT SATISFY THE ARMS LENGTH PRINCIPLE AS ENVISAGED UNDER TH E ACT AND IN DOING SO THE LD. DRP HAS GROSSLY ERRED IN AGREEING WITH THE LD. TRANSFER PRICING OFFICERS (TPO ) ACTION OF: 2.1 DISREGARDING THE ARMS LENGTH PRICE (ALP) AND THE METHODICAL BENCHMARKING PROCESS CARRIED OUT BY THE ASSESSEE IN THE TRANSFER PRICING (TP) DOCUMENTATION MAINTAINED BY IT IN TERMS OF SEC. 92D OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES 1962; 2.2 MODIFICATION OF THE COMPARABLE COMPANIES SET AS IDENTIFIED BY THE APPELLANT BY ARBITRARILY APPLYING THE WAGES-TO-SALES RATIO WITHOUT PROVIDING ANY COGENT REA SONS FOR THE SAME. 2.3 APPLYING THE SAID WAGES-TO-SALES RATIO IN AN INCORR ECT MANNER TO THOSE COMPANIES WHOSE SEGMENTAL OPERATING MARGIN WAS CONSIDERED BY THE APPELLANT AND WERE FUNCTIONALLY COMPARABLE TO THE SOFTWARE DEVELOPMENT SERVICES OF THE APPELLANT THEREBY FAILING TO APPRECIA TE THE COMMERCIAL REALITY THAT SUCH RATIO CANNOT BE APPLIED TO ITA NO.5150/DEL/2010 3 SEGMENTAL COMPANIES AS THE DATA FOR SEGMENTAL WAGES IS NOT AVAILABLE IN THE PUBLIC DOMAIN. 2.4 APPLYING THE SCREENING FILTER OF RELATED PARTY TRANSACTIONS ON COMPANIES WHOSE CONSOLIDATED FINANCIALS WERE AVAILABLE THEREBY IGNORING THE BUSINESS/COMMERCIA L REALITY THAT THE EFFECT OF RELATED PARTY TRANSACTION S IF ANY WOULD BE NEGATED BY CONSIDERING THE CONSOLIDATED FINANCIALS OF THE COMPARABLE COMPANIES. 2.5 BY WRONGLY COMPUTING THE WAGES TO SALES RATIO IN CASE OF CERTAIN COMPARABLE COMPANIES. 2.6 BY INCLUDING COMPANIES LIKE INFOSYS TECHNOLOGIES LTD. KALS INFORMATION SYSTEMS LIMITED AND WIPRO LIMIT ED AS COMPARABLE COMPANIES WITHOUT APPRECIATING THAT THE IR FUNCTIONAL PROFILE BUSINESS MODEL AND SCALE OF OPERATI ON ARE NOT COMPARABLE WITH THAT OF THE APPELLANT. 2.7 ERRED IN LAW AND FACTS IN REJECTING A COMPARABLE COMPANY IN SOFTWARE DEVELOPMENT SERVICES SEGMENT VIZ. SPACE COMPUTER AND SYSTEMS LIMITED BASED UPON GROSSLY INCORRECT ASSUMPTION WITH RESPECT TO THE FACT THAT THE COMPANY IS INTO FIRST YEAR OF OPERATION AND FUNCTIO NALLY NOT COMPARABLE. 2.8 NOT ALLOWING THE APPELLANT THE BENEFIT OF THE DIFFERENCES IN THE ACCOUNTING POLICY WITH RESPECT TO THE HIGHER DEPRECIATION CHARGED BY THE APPELLANT AS COMP ARED TO THE COMPARABLE COMPANIES WHICH WOULD HAVE REDUCED THE PROFITABILITY OF THE APPELLANT THEREBY DISTORTIN G COMPARABILITY. 2.9 RESORTING TO AN ARBITRARY REJECTION OF LOW-PROFI T/LOSS MAKING COMPANIES SELECTED BY THE APPELLANT BASED ON ERRONEOUS REASONS AND THEREBY SELECTING ONLY HIGH-PROF IT MAKING COMPANIES THUS RESORTING TO CHERRY PICKING AND THEREBY DERIVING AN INCORRECT/UNREPRESENTATIVE INDUST RY SET FOR BENCHMARKING THE OPERATING PROFIT MARGIN EARNED BY THE APPELLANT AND FURTHER THUS DEMONSTRATING AN INTENTION TO ARRIVE AT A PRE-FORMULATED OPINION WIT HOUT COMPLETE AND ADEQUATE APPLICATION OF MIND WITH THE SINGLE- MINDED INTENTION OF MAKING AN ADDITION TO THE RETUR NED INCOME OF THE APPELLANT. ITA NO.5150/DEL/2010 4 2.10 IGNORING THE FACT THAT THE APPELLANT IS ENTITLE D TO TAX HOLIDAY U/S 10A OF THE ACT ON ITS PROFITS FROM PROVISIO N OF SOFTWARE DEVELOPMENT SERVICES AND THEREFORE WOULD NO T HAVE ANY UNTOWARD MOTIVE OF DERIVING A TAX ADVANTAG E BY MANIPULATING TRANSFER PRICES OF ITS INTERNATIONAL TRANSACTIONS. 3. THE LD. DRP ERRED BOTH ON FACTS AND IN LAW IN CONFIRMING THE ADDITION OF RS. 1 239 564/- BY HOLDIN G THAT THE APPELLANTS INTERNATIONAL TRANSACTION IN THE NATU RE OF PROVISION OF MARKETING SUPPORT SERVICES DOES NOT SATISFY THE ARMS LENGTH PRINCIPLE AS ENVISAGED UNDER THE ACT AND IN DOING SO THE LD. DRP HAS GROSSLY ERRED IN AGREEING W ITH THE LD. TPOS ACTION OF: 3.1 DISREGARDING THE ARMS LENGTH PRICE (ALP) AND THE METHODICAL BENCHMARKING PROCESS CARRIED OUT BY THE ASSESSEE IN THE TRANSFER PRICING DOCUMENTATION MAINTAINE D BY IT IN TERMS OF SEC. 92D OF THE ACT READ WITH RULE 10D OF THE INCOME TAX RULES 1962 (RULES): 3.2 RESORTING TO ARBITRARY AND MECHANICAL REJECTION OF COMPANIES AND IN DOING SO HAVE GROSSLY ERRED IN REJECTI NG FROM THE FINAL SET COMPANIES WHICH ARE HAVING A FUNC TIONS ASSET RISK (FAR) PROFILE SIMILAR TO THAT OF THE APPELLA NTS PROVISION OF MARKETING SUPPORT SERVICES AND THEREBY COMPLETELY DISREGARDING THE PRINCIPLES OF COMPARABILI TY AS ENUNCIATED IN THE TRANSFER PRICING REGULATIONS. 3.3 NOT APPRECIATING THE FACT THAT THE COMPANIES SELECTED BY THE APPELLANT FOR COMPARISON PURPOSES IN IT S TRANSFER PRICING STUDY WERE ALSO SELECTED BY THE APPELL ANT IN AY 2005-06 AND THE SAME HAVE BEEN ACCEPTED BY THE LD. TPO IN THAT YEAR. 4. FAILING TO APPRECIATE THAT IF AT ALL CURRENT YE AR DATA NEEDS TO BE USED THEN OTHER FUNCTIONALLY COMPARABLE COMPANIES AVAILABLE IN THE DATABASES SHOULD ALSO BE CONSIDERED AND INCLUDED IN THE FINAL COMPARABLE SET. 5. FAILING TO APPRECIATE THAT THE APPELLANT BEING A CAPTIVE SERVICE PROVIDER IS ENTITLED TO A BENEFIT OF A WORKING CAPITAL ADJUSTMENT. 6. DENYING THE APPELLANT THE BENEFIT OF A RISK ADJUSTMENT BY COMPLETELY IGNORING THE BUSINESS/COMMERCIAL REALITY THAT SINCE THE APPELLANT IS ITA NO.5150/DEL/2010 5 REMUNERATED ON AN ARMS LENGTH COST PLUS BASIS I.E. IT IS COMPENSATED FOR ALL ITS COSTS PLUS A PRE-AGREED MARK-UP THE APPELLANT UNDERTAKES MINIMAL BUSINESS RISKS AS AGAINST COMPARABLE COMPANIES THAT ARE FULL FLEDGED RISK TAKIN G ENTREPRENEURS. 7. DISREGARDING MULTIPLE YEAR/PRIOR YEARS DATA AS USED BY THE APPELLANT IN THE TP DOCUMENTATION REPORT AND HOLDING THAT CURRENT YEAR (I.E. FY 2005-06) DATA FO R COMPARABLE COMPANIES SHOULD BE USED DESPITE THE FACT THAT THE SAME WAS NOT AVAILABLE TO THE APPELLANT AT T HE TIME OF PREPARING ITS TP DOCUMENTATION. 8. DENYING THE BENEFIT OF (+/-) 5 PERCENT RANGE MENTIONED IN PROVISO TO SEC. 92C(2) OF THE ACT WHILE COMPUTING THE ALP. THE ABOVE GROUNDS ARE WITHOUT PREJUDICE TO EACH OTHE R. THE APPELLANT CRAVES LEAVE TO ALTER AMEND OR WITHDR AW ALL OR ANY OF THE GROUNDS HEREIN OR ADD ANY FURTHER GROU NDS AS MAY BE CONSIDERED NECESSARY EITHER BEFORE OR DURING TH E HEARING. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE COMP ANY IS AN INDIAN COMPANY AND ALMOST THE ENTIRE SHARE CAPITAL OF THE ASSESSEE COMPANY IS OWNED BY AVAYA INTERNATIONAL LLC A DELAW ARE CORPORATION. DURING THE YEAR THE ASSESSEE IN ORDER TO BENCHMARK THE INTERNATIONAL TRANSACTIONS IN SOFTWARE DEVELOPMENT AND IN MARKET SUPPORT SERVICE HAS IDENTIFIED TNMM AS THE MOST APPROPR IATE METHOD WITH NET PROFIT BASED ON COST (OP/OC) AS A PROFIT LEVE L INDICATOR (PLI). THE MARGIN OF THE ASSESSEE IS 18.43% IN SOFTWARE DEVELOPM ENT SEGMENT AND 5.24% IN MARKET SUPPORT SERVICE SEGMENT. T HE TPO AND THE ASSESSING OFFICER BOTH HAVE ACCEPTED TNMM WITH OP/O C AS A PLI AS THE MOST APPROPRIATE METHOD FOR BENCHMARKING THE INT ERNATIONAL TRANSACTIONS. HOWEVER INSTEAD OF RELYING ON THE CURR ENT YEAR FINANCIAL DATA OF THE COMPARABLES THE ASSESSEE HAD USED WEIGHTED A VERAGE MARGINS OF THREE YEARS TO BENCHMARK THE INTERNATIONAL TRANSACTIONS AND IN PLACE OF THAT THE TPO HAS ONLY RELIED ON THE CURRENT YEAR DATA OF ITA NO.5150/DEL/2010 6 THE COMPARABLES FOR DETERMINING THE ARMS LENGTH PRIC E BY RELYING ON THE DECISION OF ITAT IN THE CASE OF CUSTOMER SERVICES I NDIA PVT. LTD. VS. ACIT 30 SOT 486 (DEL) AND LEARNED DRP HAS UPHELD SUCH ACTION OF THE TPO. 4. THE ASSESSEE HAD SUBMITTED 50 COMPARABLES WHILE ARRIVI NG AT ARMS LENGTH PRICE IN TRANSFER PRICING STUDY. HOWEVER LEARNED TPO HAS APPLIED THE FOLLOWING THREE FILTERS:- REJECTED COMPANIES HAVING RELATED PARTY TRANSACTIONS A S A PERCENTAGE OF SALES MORE THAN 15% REJECTING COMPANIES WHOSE FINANCIAL DATA IS NOT AVAILA BLE. ACCEPTING COMPANIES WHOSE WAGES TO SALES RATIO IS IN THE RANGE OF 30 TO 60% 5. IN THIS MANNER THE TPO HAS SHORT-LISTED ONLY FOUR P ARTIES ON THE BASIS OF WHICH HE HAS WORKED OUT MEAN OF MARGIN AT 30. 98%. THE DETAILS ARE AS FOLLOWS:- S.NO. COMPANYS NAME MARGIN 1. INFOSYS TECHNOLOGIES LTD. 38.74 2. KALS INFORMATION SYSTEM LIMITED 37.78 3. VISUALSOFT TECH. LTD. 13.05 4. WIPRO LIMITED 34.38 MEAN 30.98 6. BY TAKING THE SAID MARGIN LEARNED TPO HAS WORKED OUT THE DIFFERENCE OF SOFTWARE DEVELOPMENT SEGMENT AT ` 4 44 46 736/- IN THE FOLLOWING MANNER:- OPERATING COST 3 54 157 724 OP/OC 30.98% MARGIN 109 718 062 ARMS LENGTH PRICE 463 875 786 PRICE CHARGED BY THE ASSESSEE 419 429 050 DIFFERENCE 44 446 736 % OF DIFFERENCE WITH ALP 9.58% ITA NO.5150/DEL/2010 7 7. ON THE SEGMENT OF MARKET SUPPORT SERVICES THE ASSESSEE HAS SELECTED SEVEN COMPARABLES AS PER IMMEDIATE PRECEDING Y EAR THE DETAILS OF WHICH ARE AS FOLLOWS:- S.NO. S.NO. S.NO. S.NO. COMPANY NAME COMPANY NAME COMPANY NAME COMPANY NAME OP/TC OP/TC OP/TC OP/TC 1. COTTON TEXTILES EXPORT PROMOTION COUNCIL -56.39% 2. EXPORT PROMOTION COUNCIL FOR HANDICRAFTS NA 3. IL&FS ACADEMY FOR INSURANCE & FINANCE LTD. 0.53% 4. INDIACOM LTD. 12.70% 5. TSR DARASHAW LTD. 16.29% 6. MCS LTD. 9.56% 7. EMPIRE INDUSTRIES LTD. 15.78% AVERA AVERA AVERA AVERAGE GEGE GE - -- -0.26% 0.26% 0.26% 0.26% 8. OUT OF ABOVE SEVEN PARTIES LEARNED TPO HAS REJECTE D THE THREE COMPARABLES MENTIONED AT SL.NO.1 2 AND 3 AND HAS WOR KED OUT AS MEAN MARGIN AT ` 13.58% IN THE FOLLOWING MANNER:- S.NO. COMPANYS NAME MARGINS FOR THE YR. ENDING MARCH 2006 1. INDIACOM LIMITED 12.70 2. TSR DA RASHAW LIMITED 16.56 3. MCS LIMITED 9.56 4. EMPIRE INDUSTRIES LIMITED 15.78 MEAN 13.58% HE HAS WORKED OUT THE ADDITION OF ` 12 39 564/- ON T HIS ACCOUNT AS FOLLOWS:- OPERATING COST 14 854 086 OP/OC 13.58% MARGIN 2 017 184 ARMS LENGTH PRICE 16 871 270 PRICE CHARGED BY THE ASSESSEE 15 631 706 DIFFERENCE 1 239 564 % OF DIFFERENCE WITH ALP 7.34% ITA NO.5150/DEL/2010 8 9. THE FIRST AND FOREMOST CONTENTION OF THE LEARNED A R AGAINST THE ORDER PASSED BY THE DRP IS THAT THE OBJECTIONS OF THE A SSESSEE HAVE BEEN REJECTED SUMMARILY WITHOUT DISCUSSING IN DETAIL TH E REASONS FOR WHICH THOSE OBJECTIONS HAVE BEEN REJECTED. HE SUBMIT TED THAT THE ASSESSEE HAS VALID REASONS ON THE BASIS OF WHICH IT COULD BE SHOWN THAT THE ARMS LENGTH PRICE COMPUTED BY THE TPO IS NOT AS P ER THE PROVISIONS OF THE ACT. HE SUBMITTED THAT SO AS IT RELAT ES TO DETERMINATION OF ARMS LENGTH PRICE IN RESPECT OF SOFT WARE DEVELOPMENT SEGMENT THE MAIN OBJECTION OF THE ASSESSEE IS REGARDING INCLUSION OF INFOSYS TECHNOLOGY LTD. AND WIPRO LTD. HE SUBMITTED T HAT COMPARISON HAS TO BE MADE WITH THE LIKE CONCERNS. THE TURNOVER OF THOSE CONCERNS WERE IN THE VICINITY OF ` 9028 CRORES OF INFOSYS TECHN OLOGY LTD. AND ` 10 264 CRORE IN RESPECT OF WIPRO LTD. AS AGAINST THE TURNOVER OF THE ASSESSEE OF ` 42 CRORE ONLY. HE IN THIS REGARD HAS SUBMIT TED THE FOLLOWING TABLE TO DESCRIBE THE FACTUAL ASPECT THAT T HE TURNOVER OF THE ASSESSEE DOES NOT MATCH WITH THOSE CONCERNS:- COMPANY NAME TURNOVER (IN CR.) ASSESSEE TURNOVER (IN CR.) INFOSYS TECHNOLOGIES LIMITED 9 028 WIPRO LTD. 10 264 KALS INFORMATION SYSTEM 1.98 VISUALSOFT 160.25 42 10. EVEN OTHERWISE LEARNED AR CONTESTED THE INCLUSION OF THESE COMPANIES AS COMPARABLES ON THE GROUNDS STATED IN THE BE LOW MENTIONED TABLE:- ITA NO.5150/DEL/2010 9 THE TABLE BELOW ILLUSTRATES WHY INFOSYS AND WIPRO SHOULD BE EXCLUDED FROM THE ABOVE LIST: BASIS INFOSYS WIPRO AVAYA RISK PROFILE FULL FLEDGED RISK TAKING ENTREPRENEURS FULL FLEDGED RISK TAKING ENTREPRENEURS MINIMAL RISK. 100% SERVICES TO AES. NATURE OF SERVICES INCLUDES CONSULTING APPLICATION DESIGN DEVELOPMENT RE- ENGINEERING AND MAINTENANCE SYSTEMS INTEGRATION PACKAGE EVALUATION AND IMPLEMENTATION AND BUSINESS PROCESS MANAGEMENT. INFRASTRUCTURE SERVICES BPO SERVICES TESTING SERVICES CONSULTING APPLICATION DEVELOPMENT AND MAINTENANCE SERVICES. CONTRACT SOFTWARE DEVELOPMENT SERVICES. TURNOVER 9 028 CRORES 10 264 CRORES 42 CRORES OWNERSHIP OF PROPRIETARY PRODUCTS DEVELOPS PROPRIETARY PRODUCTS LIKE FINACLE INFOSYS ACTICE DESK OWNS INTANGIBLE ASSETS WORTH INR 69 500 CRORES. R&D SERVICES CONSTITUTE 33% OF TOTAL SERVICES. NOT APPLICABLE. NO INTANGIBLE CREATED AS COMPANY OPERATES AS CAPTIVE SOFTWARE DEVELOPER FOR PARENT AE. EXPENDITURE ON ADVERTISING/S ALES PROMOTION 61 CRORES 96.8 CRORES NIL EXPENDITURE ON RESEARCH AND DEVELOPMENT 102 CRORES NIL IN VIEW OF THE ABOVE TABLE INFOSYS AND WIPRO CANNO T BE USED AS THE COMPARABLE COMPANIES AND SHOULD BE EXCLUDED FOR THE DETERMINATION OF ALP. 11. THE OTHER OBJECTION RAISED BY LEARNED AR IS REGAR DING THE FACTUAL ERROR COMMITTED BY THE TPO. HE SUBMITTED THAT THE T PO HAS ADOPTED THE WAGE COST/SALES RATIO OF THE COMPANIES FALLING WITH IN THE RANGE OF 30% TO 60%. HE SUBMITTED THAT OUT OF REJECTED COMPA RABLES THE FOLLOWING FOUR COMPANIES WERE HAVING RATIO BETWEEN T HE SAID RANGE AND THOSE HAVE WRONGLY BEEN REJECTED BY TPO. HE REF ERRED TO THE ITA NO.5150/DEL/2010 10 FOLLOWING TABLE TO DESCRIBE THAT THOSE FOUR COMPANIES ARE FALLING WITHIN THE RANGE OF 30% TO 60%:- COMPANY NAME COMPANY NAME COMPANY NAME COMPANY NAME WAGES/SALES WAGES/SALES WAGES/SALES WAGES/SALES COMPUTED BY COMPUTED BY COMPUTED BY COMPUTED BY LD LDLD LD. TPO . TPO . TPO . TPO CORRECT CORRECT CORRECT CORRECT WAGES/SALES WAGES/SALES WAGES/SALES WAGES/SALES RATIO RATIO RATIO RATIO REF. REF. REF. REF. MELSTAR INFORMATION TECHNOLOGIES LIMITED 60.17% 57.88% ANNUAL REPORT SQL STAR INTERNATIONAL LTD. 60.64% 54.95% ANNUAL REPORT SASKEN COMMUNCIATION TECHNOLOGIES LTD. 64.31% 54.25% ANNUAL REPORT SATYAM COMPUTER SERVICES LTD. 61.28% 54.28% ANNUAL REPORT 12. HE SUBMITTED THAT IF THOSE FOUR COMPANIES ARE ALSO INCLUDED IN THE COMPARABLES THEN THE MEAN MARGIN WILL COME TO 20.94% WHICH IS AS PER THE FOLLOWING TABLE:- OPERATING PROFIT MARGIN OF COMPANIES WHOSE WAGES TO OPERATING PROFIT MARGIN OF COMPANIES WHOSE WAGES TO OPERATING PROFIT MARGIN OF COMPANIES WHOSE WAGES TO OPERATING PROFIT MARGIN OF COMPANIES WHOSE WAGES TO SAL SAL SAL SALES RATIO WAS INCORRECTLY COMPUTED BY THE LD. TPO ALONG ES RATIO WAS INCORRECTLY COMPUTED BY THE LD. TPO AL ONG ES RATIO WAS INCORRECTLY COMPUTED BY THE LD. TPO AL ONG ES RATIO WAS INCORRECTLY COMPUTED BY THE LD. TPO AL ONG WITH THE FINAL COMPARABLE SET USED BY THE TPO WITH THE FINAL COMPARABLE SET USED BY THE TPO WITH THE FINAL COMPARABLE SET USED BY THE TPO WITH THE FINAL COMPARABLE SET USED BY THE TPO PARTICULARS OP/TC MELSTAR INFORMATION TECHNOLOGIES LTD. 5.14% SQL STAR INTERNATIONAL LTD. -16.17% SASKEN COMMUNCIATIONTECHNOLOGIES LTD. 13.32% SATYAM COMPUTER SERVICES LIMITED 41.25% KALS INFORMATION SYSTEMS LTD. 37.78% INFOSYS TECHNOLOGIES LTD. 38.74% VISUALSOFT TECHNOLOGIES LTD. (MERGED) 13.05% WIPRO LTD. 34.38% MEAN MEAN MEAN MEAN 20.94% 20.94% 20.94% 20.94% ITA NO.5150/DEL/2010 11 13. HE SUBMITTED THAT IF THE ABOVE ADJUSTMENTS ARE GRA NTED TO THE ASSESSEE THEN THE ASSESSEES CASE WILL BE COVERED BY THE A DJUSTMENT OF +/- 5%. HE REFERRED TO THE PROVISO TO SECTION 92 C(2) AND CONTENDED THAT IT WILL NOT BE A CASE WHERE ANY ADDITION COULD BE SUSTAINED ON ACCOUNT OF DIFFERENCE IN ARMS LENGTH PRICE. IN THE ALTERNATIVE HE SUBMITTED THAT NO BASIS HAS BEEN GIVEN BY THE TPO FOR A DOPTING THE RANGE OF 30 TO 60% IN THE WAGE COST/SALE RATIO AS THE SAME COULD BE THE RANGE OF 30% TO 70% AND IF 30% TO 70% RANGE IS T AKEN INTO CONSIDERATION THEN MEAN MARGIN WILL BE APPLICABLE ONLY 16.45% WHICH IS LESS THAN THE MARGIN DECLARED BY THE ASSESSEE. SIMILAR LY CONSIDERING THE WAGE COST/SALE RATIO IN THE RANGE OF 2 0% TO 60% THE MARGIN HAS BEEN COMPUTED BY LEARNED AR AT 18.66% WHI CH IS ALSO IN THE VICINITY OF MARGIN DECLARED BY THE ASSESSEE. 14. HE FURTHER SUBMITTED THAT THE ASSESSEE HAS SOUGHT INCL USION OF SPACE COMPUTER AND SYSTEMS LTD. AND THE SAID COMPARABL E HAS BEEN REJECTED BY THE TPO WRONGLY ON THE GROUND THAT IT W AS ITS FIRST YEAR OF THE OPERATION. HE SUBMITTED THAT SUCH FINDING RECORD ED BY THE TPO IS FACTUALLY WRONG AS THE FINANCIAL YEAR 2005-06 WAS NOT THE FIRST YEAR OF OPERATION OF THE SAID COMPANY BUT IT WAS THE 16 TH YEAR OF OPERATION AND HE IN THIS REGARD REFERRED TO THE PAGE 471 OF THE PAPER BOOK. THUS HE SUBMITTED THAT THE SAID COMPARABLE HAS WRONGLY BEEN REJECTED BY THE TPO AND IF THE SAID COMPARABLE IS TAK EN INTO CONSIDERATION ALONG WITH THE FOUR COMPANIES TAKEN BY THE TPO THEN THE MEAN MARGIN WOULD BE AROUND 13.5% AGAINST WHICH THE ASSESSEES MARGIN ALREADY EXCEEDS. 15. ARGUING ON MARKETING SUPPORT SERVICES IT WAS SUBM ITTED BY LEARNED AR THAT THREE COMPARABLES NAMELY COTTON T EXTILES EXPORT PROMOTION COUNCIL EXPORT PROMOTION COUNCIL FOR HAN DICRAFTS AND IL & FS ACADEMY FOR INSURANCE & FINANCE LTD HAVE WRONGLY BEEN REJECTED ITA NO.5150/DEL/2010 12 BY THE TPO. IN THE ALTERNATIVE HE SUBMITTED THAT E VEN IF REJECTION OF THESE THREE PARTIES IS UPHELD THEN ALSO THE ASSESSEE IS E NTITLED TO BENEFIT OF +/- 5% RANGE AS MENTIONED IN THE PROVISO T O SECTION 92C(2) OF THE ACT AND HE IN THIS REGARD REFERRED TO THE D ECISIONS OF ITAT IN THE CASE OF SONY INDIA PVT. LTD. VS. DCIT 315 ITR 150 (D EL) DEVELOPMENT CONSULTANTS PVT. LTD. VS. DCIT 115 TTJ577 (KOL) AND CO RDYS R & D (INDIA) PVT. LTD. VS. ACIT 2011-TII-01-ITAT-HYD-TP. 16. THUS HE SUBMITTED THAT LOOKING FROM ANY ANGLE T HE ADJUSTMENT MADE BY THE TPO HAS NO SUBSTANCE AND THE PROFIT MARGIN DECLARED BY THE ASSESSEE ARE ACCORDING TO ARMS LENGTH PRICE AND TH EREFORE THE ADDITIONS MADE IN THE ASSESSMENT ORDER SHOULD BE DELETED. 17. ON THE OTHER HAND RELYING UPON THE ORDER OF TP O AND DRP IT WAS SUBMITTED BY LEARNED DR THAT THE TPO HAS PROVIDED DET AILED REASONS FOR ARRIVING AT AN ARMS LENGTH PRICE AND HE HAS CORR ECTLY APPLIED THE AFOREMENTIONED THREE FILTERS ACCORDING TO WHICH THE MEAN MARGIN HAS BEEN COMPUTED AT 30.98% IN RESPECT OF COMPARABLE FOU R PARTIES. HE SUBMITTED THAT THE OTHER PARTIES HAVE RIGHTLY BEEN RE JECTED AND REASONS HAVE BEEN RECORDED IN THE ORDER OF THE TPO. HE SUBMITTED THAT IF THERE IS ANY FACTUAL ERROR IN COMPUTING THE WAGE/SALE RATIO COMPUTED BY THE TPO THE SAME CAN BE GOT VERIFIED FR OM THE TPO. IT WAS FURTHER SUBMITTED THAT IN RESPECT OF MARKETING SUPP ORT SERVICE THE MEAN MARGIN HAS RIGHTLY BEEN COMPUTED AT 13.58% AND THUS THE ADDITION OF ` 12 39 564/- HAS RIGHTLY BEEN MADE. TH US BE SUPPORTED THE ORDER OF THE ASSESSING OFFICER TPO AND DRP. 18. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS I N THE LIGHT OF THE MATERIAL PLACED BEFORE US. SO FAR AS IT RELATES T O APPLYING THE FILTER FOR REJECTION OF COMPARABLE COMPANIES HAVING RELATED PARTY TRANSACTIONS AS A PERCENTAGE OF SALES MORE THAN 15% WE UPHOLD THE ITA NO.5150/DEL/2010 13 SAID FILTER. SO AS IT RELATES TO ANOTHER FILTER REJEC TING THE COMPARABLES WHOSE CURRENT YEAR FINANCIAL DATA IS NOT AVAILABLE W E FIND THAT THE SAID FILTER HAS BEEN UPHELD BY THE DRP BY FOLLOWING THE D ECISION OF ITAT DELHI BENCH IN THE CASE OF CUSTOMER SERVICES PVT. LTD. VS. ACIT 30 SOT 486 IN WHICH IT HAS BEEN HELD THAT COMMISSIONER OF INC OME-TAX (APPEALS) WAS FULLY JUSTIFIED IN HOLDING THAT MAIN RUL E OF SECTION 10B(4) WAS APPLICABLE TO THE FACTS OF THE ASSESSEES CASE AND IT W AS MANDATORY ON THE PART OF THE TPO TO USE DATA RELATIN G TO FINANCIAL YEAR 2002-03 IN WHICH THE INTERNATIONAL TRANSACTIONS WERE ADMITTEDLY ENTER INTO BY THE ASSESSEE WITH ITS ASSOCIATE ENTERPRISES. THEREF ORE THE SECOND FILTER IS ALSO UPHELD. 19. AGAINST THE THIRD FILTER IT IS THE CASE OF THE ASSE SSEE THAT NO REASON HAS BEEN GIVEN BY THE TPO BY ADOPTING THE WAGE TO SALE RATIO BETWEEN 30 TO 60%. FOR THIS ALSO LEARNED DRP HAS ASSIGN ED THE REASON AND IT IS FOUND THAT ASSESSEES WAGE/SALE RATIO IS 46.96% A ND IF THE SAME IS TAKEN INTO CONSIDERATION THEN A REASONABLE VIE W WILL BE THAT +/- 15% RATIO ADOPTED BY THE TPO TO FILTER THE COMP ARABLES IS REASONABLE. THUS WE SEE JUSTIFICATION IN THE ORDER OF THE DRP AND TPO TO HOLD THAT WAGE/SALE RATIO HAS BEEN RIGHTLY DETERMI NED BETWEEN 30% TO 60%. HOWEVER THE OBJECTION OF THE ASSESSEE IS REGAR DING WRONG CALCULATIONS MADE WHILE APPLYING THIS FILTER WITH RESP ECT TO AFOREMENTIONED FOUR PARTIES WHICH ARE DESCRIBED IN PA RA 11 OF THIS ORDER AND IT HAS BEEN CLAIMED BY THE ASSESSEE THAT THEIR RATIO ALSO FALLS BETWEEN 30 TO 60% AND THEREFORE THEY HAVE WRONGLY BEEN EXCLUDED. WE FOUND FORCE IN SUCH CONTENTION OF LEARNED AR. WE THEREFORE HOLD THAT IF THE WAGE/SALE RATIO OF AFOREMENTIONED PARTIE S AS MENTIONED IN PARA 11 OF THIS ORDER FALL WITHIN THE RANGE OF 30% TO 60% THEN THOSE PARTIES SHOULD BE INCLUDED IN THE LIST OF COMPARABLES T O COMPUTE THE MEAN MARGIN. IT IS THE CASE OF THE ASSESSEE THAT IF THOSE FOUR PARTIES ARE TAKEN INTO CONSIDERATION THEN THE MEAN RATIO W ILL COME TO 20.94%. ITA NO.5150/DEL/2010 14 AS AGAINST THAT THE MEAN MARGIN OF ASSESSEE IS 18.43% AND IT FALLS WITHIN THE +/- 5% RATIO. IN OUR OPINION SUCH CONTE NTION OF THE ASSESSEE GOES TO THE ROOT OF THE MATTER AND HENCE HAS TO BE CONSIDERED AFTER VERIFICATION OF THE CLAIM OF THE ASSESSEE. FOR VERIFIC ATION WE CONSIDER IT JUST AND PROPER TO RESTORE THIS ISSUE TO THE FILE OF DRP WITH A DIRECTION TO VERIFY THE CLAIM OF THE ASSESSEE AND IF IT IS FOUND T HAT THOSE FOUR PARTIES HAVE WAGE/SALE RATIO BETWEEN THE RANGE OF 30 TO 60% THEN THE SAME SHOULD ALSO BE INCLUDED IN THE LIST OF THE COMPARA BLES AND MEAN MARGIN SHOULD BE WORKED OUT. WE DIRECT ACCORDINGLY. 20. IT HAS ALSO BEEN THE CONTENTION OF LEARNED AR THA T THE COMPARABLE NAMELY M/S SPACE COMPUTER AND SYSTEMS LTD . HAS WRONGLY BEEN EXCLUDED SIMPLY ON THE GROUND THAT IT W AS THE FIRST YEAR OF OPERATION OF THE COMPARABLE. HE SUBMITTED THAT T HE FACTUAL POSITION WAS OTHERWISE AS THE CURRENT FINANCIAL YEAR WAS THE 16 TH FINANCIAL YEAR OF THE SAID COMPANY. THIS FACT ALSO REQUIRES VERIFICAT ION AND AFTER ASCERTAINING THE FACT THAT WHETHER SUCH CONTENTION OF THE ASSESSEE IS CORRECT AND WHETHER THE SAID PARTY CAN BE INCLUDED I N THE LIST OF COMPARABLE AS PER FILTERED CRITERIA. IF THIS COMPARA BLE FULFILLS THE FILTERED CRITERIA THE SAID PARTY MAY ALSO BE INCLUDED FOR COM PUTING THE MEAN MARGIN. LEARNED DRP WILL VERIFY SUCH FACT AND AFTER VERIFYING A SPECIFIC FINDING SHOULD BE RECORDED IN THIS REGARD AND APPROPR IATE RELIEF SHOULD BE GIVEN TO THE ASSESSEE. WE DIRECT ACCORDINGLY. 21. SO FAR AS IT RELATES TO THE CONTENTION OF LEARNED AR FOR EXCLUSION OF FOUR PARTIES NAMELY INFOSYS TECHNOLOGIES LTD. KAL S INFORMATION SYSTEM LIMITED VISUALSOFT TECH LTD. AND WIPRO LIMITED PARTICULARLY INFOSYS TECHNOLOGIES LTD. AND WIPRO LTD. WE ARE OF TH E OPINION THAT THEY CANNOT BE EXCLUDED AS THE ASSESSEE ITSELF HAS TAKEN T HOSE PARTIES AS COMPARABLES AND NOW THE ASSESSEE CANNOT PLEAD THEIR EX CLUSION ITA NO.5150/DEL/2010 15 SIMPLY FOR THE REASON THAT THEIR RESULTS ARE GOING AGAI NST THE ASSESSEE. THEREFORE SUCH CONTENTION OF THE ASSESSEE IS REJECTED. 22. NOW COMING TO THE MARKET SUPPORT SERVICES SEGMENT THE ASSESSEE HAS WORKED OUT THE MEAN MARGIN OF SEVEN COMPARAB LES AT (-) 0.26 BY COMPARING THE RESULTS OF SEVEN PARTIES ON THE B ASIS OF IMMEDIATE PRECEDING YEAR AND IT IS THE CASE OF THE ASSE SSEE THAT OUT OF THOSE SEVEN PARTIES THREE HAVE WRONGLY BEEN REJECTED A S COMPARABLE ON MERE CONJECTURES AND SURMISES. THE EXCLUSION OF COTT ON TEXTILES EXPORT PROMOTION COUNCIL HAS BEEN SUPPORTED BY TPO ON THE GROUND THAT THE SAID CONCERN IS AN AUTONOMOUS NON-PROFIT MAK ING EXPORT PROMOTION BODY WHICH DERIVES ITS INCOME FROM MEMBERSHI P FEE ADVERTISEMENT MARKET DEVELOPMENT AND ASSISTANCE AND IN TEREST AND THUS HE HAS HELD THAT IT IS NOT A COMMERCIAL ORGANIZ ATION. THE ASSESSEE HAS NOT SHOWN ANY CREDENTIAL THAT SUCH OBSERVATION S OF THE TPO ARE INCORRECT. THEREFORE WE UPHOLD THE REJECTI ON OF COTTON TEXTILES EXPORT PROMOTION COUNCIL AS COMPARABLE FOR THIS SEGMEN T. 23. FOR EXPORT PROMOTION COUNCIL FOR HANDICRAFTS LTD . IT HAS BEEN OBSERVED BY THE TPO THAT THIS IS AN ORGANIZATION UNDER M/O TEXTILES GOVERNMENT OF INDIA. IT IS ALSO A NON-PROFIT ORGANIZ ATION ESTABLISHED UNDER EXIM POLICY OF GOVERNMENT OF INDIA AND IT ALSO DERIVES INCOME FROM MEMBERS AS SUBSCRIPTION PARTICIPATION IN FAIRS AND EXHIBITIONS AND GRANTS-IN-AID FOR VARIOUS ACTIVITIES FROM DEVELO PMENT COMMISSIONER MINISTRY OF COMMERCE. THUS THIS CONCERN ALSO IS A NON- COMMERCIAL ORGANIZATION. THE ASSESSEE HAS NOT BROUGHT A NY MATERIAL ON RECORD TO CONTROVERT SUCH FINDINGS OF FACT RECORDE D BY THE LEARNED TPO. HENCE THE EXCLUSION OF SUCH PARTY FROM THE LIST OF COMPARABLE IS ALSO UPHELD. ITA NO.5150/DEL/2010 16 24. SO AS IT RELATES TO IL & FS ACADEMY FOR INSURANCE & FINANCE IT HAS BEEN OBSERVED BY TPO THAT THE SAID COMPANY IS DERIV ING INCOME FROM TRAINING AND ONLINE EXAMINATION FEES AND MAJOR EXPENSES ARE INCURRED ON TRAINING AND ONLINE EXAMINATION COST AND THEREFORE THIS COMPANY IS ENGAGED IN PROVIDING TRAINING IN THE FORM OF INSURANCE AND FINANCE. THEREFORE THE RESULT OF SUCH COMPANY ARE A LSO NOT COMPARABLE WITH THE RESULTS OF THE ASSESSEE. IT IS FURTHE R OBSERVED BY LEARNED TPO THAT AS PER SUBMISSION OF THE ASSESSEE VIDE LET TER DATED 28 TH JULY 2009 THAT THESE COMPANIES HAVE BEEN SELECTED ON THE BASIS OF BROADER SEARCH CRITERIA ADOPTED BY THE ASSESSEE IN TH E SEARCH PROCESS HE FOUND THAT THESE THREE COMPANIES WERE IDENT IFIED BY THE ASSESSEE USING PROWESS DATA BASE AND THEY FALL UNDER COMMU NITY SOCIAL AND PERSONAL SERVICE ECONOMIC ACTIVITY IN THE PROWESS DATA BASE. HE OBSERVED THAT SUCH BROADER SEARCH CRITERIA SHO ULD BE ADOPTED TO HAVE A WIDE VARIETY OF COMPANIES WHICH MA Y HAVE SIMILAR FUNCTIONAL PROFILE. THEREFORE ALL SUCH COMPANIES WH ICH ARE DRAWN UP BY THE SEARCH PROCESS USING ANY DATA BASE ARE TO BE ANAL YSED USING QUALITATIVE DETAILS AND FUNCTIONAL PROFILE. HE OBSERV ED THAT BY NO STRETCH OF IMAGINATION A BUSINESS ENTERPRISE WHOSE BASIS OF EXISTENCE IS PROFIT MAKING CAN BE COMPARED TO A NON-PROFIT OR GANIZATION LIKE COTTON TEXTILES EXPORT PROMOTION COUNCIL AND EXPORT PROMOTION COUNCIL FOR HANDICRAFTS. A SERVICE PROVIDING ENTERPRISE CANNO T BE COMPARED TO A COMPANY WHICH IS ENGAGED IN PROVIDING TRAINING AND ONLINE EXAMINATION IN THE FORM OF INSURANCE AND FINANCE. L EARNED AR HAS NOT SUBMITTED ANY MATERIAL TO CONTROVERT THESE FACTUAL FI NDING RECORDED BY THE TPO. IN THE ABSENCE OF ANY SUCH MATERIAL WE ARE UNABLE TO INTERFERE WITH THE DECISION OF TPO FOR EXCLUSION OF T HESE THREE PARTIES OUT OF THE LIST OF COMPARABLES AND THEREFORE WE DEC LINE TO INTERFERE AND HIS CALCULATION IS UPHELD. HOWEVER IT IS HELD THA T IF SUCH CALCULATION OF THE ASSESSEE FALLS WITHIN THE +/- 5% MARGIN BENEFIT THE SAID ISSUE MAY BE CONSIDERED BY THE DRP AS THE MATTER IS BEING RE STORED TO DRP ITA NO.5150/DEL/2010 17 ON THE SOFTWARE DEVELOPMENT SEGMENT. LD. DRP HAS NOT GIVEN ANY SPECIFIC FINDING ON THIS ISSUE THAT WHETHER OR NOT THE ASSESSEE IS ENTITLED FOR +/- 5% BENEFIT TO THE MARKETING SUPPORT SERVICE SEGMENT. 25. DURING THE COURSE OF DISCUSSION LEARNED AR DID NOT PRESS GROUND NO.5 WHICH IS WITH RESPECT TO WORKING CAPITAL ADJUSTME NT HENCE THE SAME IS DISMISSED. 26. IN THE RESULT FOR STATISTICAL PURPOSES THE APPEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED IN THE MANNER AFORESAID. THE ORDER PRONOUNCED IN THE OPEN COURT ON 25.02. 2011. SD/- SD/- [A.K. GARODIA] [I.P. BANSAL] ACCOUNTANT MEMBER JUDICIAL MEMBER DATED 25.02.2011. DK COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR ITAT TRUE COPY BY ORDER DEPUTY REGISTRAR ITAT DELHI BENCHES